Securing semiconductor supply chains

Here’s how to use the Securing semiconductor supply chains: An affirmative agenda for international cooperation.

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Introduction

1. Semiconductors are integral components of both civilian and military use products; tensions between economic gain and security risk are heightened in fields with national security implications; how the government and private sector manage semiconductor global value chains (GVCs) will directly affect US global competitiveness and national security. (p. 1)
2. The pandemic underscored the importance of semiconductors to the US economy; stagnated investment, inadequate input supplies, and logistics breakdowns led to a shortage. (p. 1)
3. As US perceptions of China have changed, calls to lessen reliance on China and for “friend-shoring” have grown; the US should seek closer collaboration with countries with policies to support technology development and whose export controls are consistent with the US. (p. 2)
4. The US is already pursuing collaborations with the EU through the Trade and Technology Council; with Japan, Australia, and India through the Quad alliance; and with Indo-Pacific economies through the Indo-Pacific Economic Framework for Prosperity. (pp. 2-3)

The Global Semiconductor Value Chain

1. Semiconductor GVCs are dominated by the US, Taiwan, South Korea, Japan, Europe, and China; the GVC consists of three main stages: R&D and chip design, fabrication, and advanced testing and packaging; R&D and chip design require substantial funding and human capital; fabrication involves a deeply technical process and significant capital expenditures. (p. 4)

Semiconductor Policy in the United States

1. Diversification of GVCs reduces costs and the likelihood of major disruptions; while the US remains a leader in the design, lack of production capacity and continued reliance on foreign manufacturers restrains industry growth; high labor costs and insufficient government support for R&D have led to a decrease in the US share of chip manufacturing. (p. 6)
2. The US has identified the production of chips as a top priority; new laws allocate billions of dollars to support increased semiconductor production and R&D. (p. 7)

Semiconductor Policy in EU Member States

1. The EU has become dependent on foreign producers, including China, for semiconductor production; the EU is adopting a law – the European Chips Act – to bolster R&D and production in Europe; state aid envisioned under the law may mean that companies will receive added benefits when partnering with the EU on semiconductor supply chains. (pp. 9-10)
2. These EU member states are best positioned for increased US semiconductor collaboration:
   • Belgium is a top player in the global semiconductor R&D supply chain, home to top research universities and one of the world’s top semiconductor R&D institutes, though it has a shortage of STEM labor that limits its high-tech potential. (pp. 11-12)
   • The Netherlands is a semiconductor powerhouse with a fully integrated vertical semiconductor supply chain including applied research, chip design, chip architecture, chip production, and system integration and applications; it is highly competitive for business, has high levels of education, is well-located, has good infrastructure and has proven to be a good US partner, though it will contend with both political pressure from the US Government and the attractiveness of the Chinese market. (pp. 12-13)
   • France has a significant presence in the European semiconductor industry with centers for R&D, manufacturing, and packaging; its industry receives support both from the EU and domestic initiatives; it is an innovation hub, is one of the world’s largest economies, is well-located and has good infrastructure; France also has access to critical mineral reserves; regulations and bureaucracy, however, can restrain the French market. (p. 14)
   • Italy has the third-largest economy in the EU with several large manufacturing sites for a diverse set of chip components; however, it has poorer economic performance and inefficient government, spends less on R&D, has a less-educated workforce and government instability, and has a complicated relationship with China. (pp. 15-16)
   • Germany is the world’s fourth-largest economy; fourth-largest exporter and fourth-largest importer of semiconductor devices; it is key to semiconductor production due to its production of key inputs; it has advanced R&D, a pro-business climate, established supply chain linkages and the policy to enforce due diligence, a strong industrial base, and a stable domestic government. (pp. 16-18)
3. The EU is an attractive partner for the US in building resilient semiconductor GVCs due to its single market, financial support for semiconductor industry development, close cooperation with the US on tech policy and export controls, and geographic proximity to the US; its relations with China create complications because of the ambivalence of the EU’s approach. (pp. 18-19)

Quad Cooperation

1. India is a major growth market, importing nearly all of its commercial semiconductor products; it has specialized in chip R&D and design due to its large population of chip designers and highly skilled IT and engineering workers; India has only two fabs that produce for defense and space use; it has pledged significant funding for building chip production, but systemic issues like water and power shortages disincentivize new investment. (pp. 19-20)

Recommendations

1. The US and its allies should a) identify the goals they seek to achieve through friend-shoring supply chains while dampening the ability of foreign adversaries to gain a competitive edge; b) collaborate on smart, targeted investments that bolster innovation; c) work together to issue consistent, predictable policies; and d) create a new Information Technology Agreement to reduce tariffs on ICT goods. (p. 23)
2. The US should avoid blanket export controls that risk dampening investment and next-generation R&D efforts; the US and its allies should consider creating a mini-regime similar to the Wassenaar Arrangement to coordinate and codify new technology controls; the US should institutionalize collaboration with the EU to avoid duplication and ensure resiliency. (pp. 23-24)
3. The EU member states and Japan are the best candidates for friend-shoring US semiconductor supply chains based on what EU and Quad countries are currently producing and their alignment with US export control policy; the best candidates in terms of supply chain security and resiliency are Belgium, Germany, and the Netherlands. (pp. 24-25)

Conclusion

At a time when major world economies are intensely focused on access to semiconductor production and development, the Securing Semiconductor Supply Chains brief provides a helpful assessment of key potential partners for the effort to develop secure and resilient supply chains among like-minded nations.

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External Resources

• Four Asian Countries Lead in US Chip Diversification Move – Bloomberg
  Thailand, Vietnam, India and Cambodia have seen significant increases in semiconductor exports.
• Remarks by National Security Advisor Jake Sullivan on Renewing American Economic Leadership at the Brookings Institution – The White House
  The Biden administration aims to entwine domestic and foreign policy more deeply.
• Chip Funds for Underdogs or Chaebols – Comparing Korea and the US – Chip Capitols
  A deep dive into South Korea’s domestic chip policymaking.
• Japan and the Netherlands Announce Plans for New Export Controls on Semiconductor Equipment – Center for Strategic and International Studies
  Coordinated actions against China on semiconductor equipment.

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